January 2016 Newsletter

Following is an example of what happened in the Canadian Stock Market in 2015:

- Royal Bank of Canada made $10 Billion in profit, for the first time in history. Share price went down (-7.3%) in the year.

- The Canadian Banks as a group went down (-8.48%) which is interesting considering Banks posted record profits and all increased their dividends.

- The TSX Index went down (-11.1%).

- Even the most revered and successful Investor in the world, Mr. Warren Buffett saw the share price of his Berkshire Hathaway go down (-12.48%) in 2015. The Canadian dollar dropped from 86 cents to 72 cents U.S. (-16.28%). Nice if you get paid in U.S. dollars, or own U.S. real estate. Not so pleasant if you get paid in Canadian dollars and have to pay bills in U.S. dollars. Florida vacations have become a lot more expensive!

The U.S. economy is doing so well that The U.S. Federal Reserve raised interest rates. The story is different in Canada, and I wouldn’t be surprised if we see another interest rate cut in 2016 because of our poor performing economy that is being hurt by Energy and Materials prices.

- The U.S. Economy is the largest and strongest in the world and they are doing well, so well in fact the Fed just raised interest rates which is a strategy to slow down growth and inflation. - GDP growth in the U.S. is increasing, just not as quickly as desired. - There is no global banking crisis. Banks and most corporations have bolstered their balance sheets, implemented share buy backs and accretive acquisitions so they are in a strong financial position. - As the stock markets have had a bad year, the valuation of companies has come down. As an example, Apple is the largest company in the world and is trading at 11 X earnings. - -- --- Overall, many high quality, large cap companies are trading at 8 to 11 X earnings and paying dividends. - The European Central Bank (ECB) is implementing their version of Quantitative Easing and flooding the markets with liquidity and cheap capital. - Housing starts in the U.S. are increasing. - New auto sales have increased from 10 million in 2008 to 17.5 million in 2015. - By some measures, the U.S. is at full employment. - S&P 500 companies are paying out less than 40% of their profits in dividends, so there is still plenty of opportunity for dividend increases. - Canadian banks which are so important to the Canadian Economy are doing just fine. Return on equity between 15% and 20%, dividend increases, record profits, and fixed cost reductions are good indicators for future performance. - In the last 70 years there have been 9 years when the market recorded a double digit loss. TSX last year was minus (-11.1%). 8 of the 9 years following this loss, have seen an average positive return of 14%.

As always, there are dark clouds on the horizon. Each quarter when I write this newsletter the storms brewing are plentiful, and different.

Here are a few thoughts for your consideration:

- Low oil prices will be the cure for low oil. There will be a consolidation in the industry and in time oil will go back up in price. It will be difficult for most energy companies during this period, and also, for specific Provinces and Cities that are heavily reliant on this sector. - Similar thinking process for low commodity prices. Exploration and development will shrink and eventually there will be shortages, which in turn spur higher prices and expansion. - Whether the geopolitical issues are in Russia, Syria, China, or Ukraine, there will always be areas of unrest and conflict in the world, as there always has been. Two years from now the list may be different, but there will be a list. We are lucky to live in Canada.

We know from looking at long term performance charts of stock markets, and individual companies that they do not go up in a straight line as if drawn using a ruler. The chart looks like a series of ups and downs, which over a longer period of time moves in an upward direction.

Over the past couple of years I have gained a better appreciation for long term thinking, patience and investing in periods of crisis by having the privilege of getting to know Mr. Hartley Richardson, who serves as Managing Director of Richardson Capital Limited. The Richardson family has been in business in Canada for 165 years. When agricultural assets were crushed in price 10 years ago, they were buyers. Oil is now in crisis and they just bought 550 more Oil wells.

Mr. Richardson exudes such calm and long term thinking it is inspirational. He thinks about his investments in generational terms. We can be tricked into thinking about our investments in daily terms, because of the constant deluge of information, instant pricing, media alerts and calls to panic.

Thank you for the privilege of working with you and helping you with your investments planning. Please call or email me if you have any questions, or wish to talk about anything in particular.